What do Qantas, BlueScope Steel, Rio Tinto and AMP have in common? Yes, each is a big, blue-chip company with a share price pummelled by a savage market. But they also featured on a list of businesses I cautioned against buying or holding more than a year ago. As the table shows, some of the price falls have been truly terrifying.
The market fell about 15 per cent from April last year to the end of the financial year, but this prophetic portfolio of nine hand-picked poor performers was down 33 per cent on average. These businesses haven't fallen because of unfavourable macro factors.
They've fallen because they are poor businesses that were trading at rich prices. So, do any of these stocks offer an opportunity? And are there any other poor, overpriced businesses to avoid?
Dodging poor performers such as BlueScope is critical to successful investing. If a share price falls 80 per cent, you need a four-bagger to recover. Instead of compounding gains, losses like this amplify pain.
In 2005 BlueScope announced net profit after tax of almost $1 billion. Last year, it lost $1 billion. This year it will lose even more. There may be a price at which a canny investor buys a poor business such as this but I prefer to avoid them altogether.
Terrible metrics
That view is shared by Selector Funds Management founder Tony Scenna, albeit with a caveat. "I would look at a terrible business but only those that have been hit by hard times rather than crunched by terrible metrics," he says. "Qantas and BlueScope, for example, have historically generated returns that rarely exceed the cost of capital. Why take the risk?"
Even the 11 per cent drop in ANZ's share price isn't enough to calm my concerns about foreign expansion, Australian banks' reliance on foreign funding and the possibility of a residential property downturn.
As for BHP, lower prices and volumes could still hit profitability if China slows. I wouldn't want to own BHP at this price and would rather be short than long. But at least part of my concern now seems to be reflected in the price.
There are Intelligent Investor analysts prepared to buy poor businesses at the right price.
Resources analyst Gaurav Sodhi says: "Business quality, if it's real, isn't hard to disguise, which is why the most extreme mispricings are often found in businesses with average economics or worse. Bad businesses can be purchased very cheaply, but it's risky."
Having warned of yesterday's ticking bombs, what of today's?
Upgrade for some
Crown, JB Hi-Fi, Harvey Norman, Fortescue Metals and Transpacific Industries have been singled out by my analytical team as blue-chips to avoid. Mining services stocks also feature. But overall, there is far less urgency to sell now.
The bombs haven't disappeared but equity prices better reflect the risks of hanging in.
That investors are unwilling to pay for optimism says something about the state of the market. The argument for selective buying has therefore strengthened in the past year or so. I'm getting quite excited by the growing pessimism. There are a slew of high-quality stocks I'd like to upgrade, including Coca Cola Amatil, Cochlear, CSL, BHP, News Corp, Woodside, Reece and ResMed.
As for stocks suitable for purchase now, QBE, Computershare, ASX and Woolworths are already available at attractive prices, with each well-supported by a healthy dividend.
Right now, there is simply no need to take on big risks.
Frequently Asked Questions about this Article…
Why have blue-chip stocks like Qantas, BlueScope Steel, Rio Tinto and AMP seen big share price falls?
The article explains the falls aren’t just broad market weakness (the market fell about 15%); a prophetic portfolio of nine poor performers was down about 33% on average. Many declines reflect companies that were poor businesses trading at rich prices rather than only unfavourable macro factors.
Should everyday investors buy or hold beaten-up blue-chip stocks such as Qantas or BlueScope?
The author cautions against buying or holding poor businesses like Qantas and BlueScope. Selector Funds founder Tony Scenna adds that he’d only consider troubled companies if they’ve been hit by temporary hard times rather than suffering terrible underlying metrics — many of these blue-chips have historically generated returns that rarely exceed their cost of capital.
Is BlueScope Steel a buying opportunity now?
The article notes BlueScope’s dramatic turnaround in fortunes — net profit after tax was almost $1 billion in 2005, it lost $1 billion last year, and is expected to lose more this year. While a very low price might tempt a canny investor, the author prefers to avoid clearly poor businesses like BlueScope.
How can investors avoid crippling losses when a share price collapses?
Avoiding poor performers is critical. The article points out that if a share falls 80%, you need a four-bagger to recover — losses amplify pain and destroy compounding. The takeaway: focus on business quality and avoid overpaying for weak companies.
What are the specific risks the article highlights for banks such as ANZ?
The article flags concerns about ANZ’s foreign expansion, Australian banks’ reliance on foreign funding and the possibility of a residential property downturn. Even an 11% fall in ANZ’s share price didn’t calm those structural concerns.
What does the article say about BHP and the outlook for resources stocks?
The author warns that lower commodity prices and volumes — for example if China slows — could hit BHP’s profitability. He wouldn’t want to own BHP at the current price and would rather be short, though some concerns appear priced in. The piece also notes mining services stocks feature among those to avoid, and that buying poor resource businesses cheaply can be very risky.
Which blue-chip stocks does the article’s analytical team single out to avoid now?
The article’s analytical team has singled out Crown, JB Hi‑Fi, Harvey Norman, Fortescue Metals and Transpacific Industries as blue-chips to avoid, and it also highlights mining services stocks as areas of caution.
Which stocks does the article recommend as potential upgrades or attractive buys with healthy dividends?
The author says growing market pessimism has strengthened the case for selective buying. Stocks mentioned as upgrades include Coca‑Cola Amatil, Cochlear, CSL, BHP, News Corp, Woodside, Reece and ResMed. Stocks listed as attractive purchases now — supported by healthy dividends — are QBE, Computershare, ASX and Woolworths.
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